December 10, 2012

Cessna challenges arbitration award to Avcorp

Calling it “deeply flawed,” Cessna Aircraft is fighting an arbitration panel’s $27.4 million award to Canadian supplier Avcorp Industries regarding a long-term supplier agreement between the companies.

Calling it “deeply flawed,” Cessna Aircraft is fighting an arbitration panel’s $27.4 million award to Canadian supplier Avcorp Industries regarding a long-term supplier agreement between the companies.

The arbitration rose from a dispute from Avcorp alleging that Cessna violated an exclusivity agreement when it bought components from dual sources.

Cessna alleges that the contract between the parties was not “sole source” or exclusive, and that Avcorp breached the contract by shipping defective parts and that deliveries were late most of the time.

Beginning in 2001, Avcorp built major structural aircraft components, such as wing spars, center wing boxes and tails for various Cessna aircraft models.

Its performance was “abysmal,” Cessna alleges in the court filing.

Over the life of the contract, Avcorp delivered 4,631 major structures to Cessna and submitted about 9,000 nonconformance reports — about two per unit shipped, the court document said.

Each had to be repaired, analyzed or dispositioned before they could be deemed airworthy and installed on an airplane, the document said.

In its 11-year relationship with Cessna, Avcorp’s deliveries were late 63 percent of the time, the court filing alleges.

In 2003, Cessna began buying Sovereign empennages, or tails, from both Avcorp and Fokker. That continued for six years.

In 2005, Cessna also began manufacturing the center wing box for its Citation CJ3.

During that time, Avcorp never suggested that Cessna was somehow in violation of its contract.

“The reason for this silence is clear,” the court filing said. “The Avcorp SAA (Strategic Alliance Agreement) was not and had never been a sole source, exclusive contract.”

The evidence was ignored by the arbitration panel, it said.

Over the years, Cessna tried to improve Avcorp’s quality by stationing inspectors inside Avcorp’s facility to inspect components full time, meeting regularly with management, teaching efficiency methods, instructing on proper sealing techniques and training for months on metal bond, the filing said.

Cessna had little choice, it said.

The products Avcorp builds are highly specialized. Putting another supplier in position to deliver them take months and years of development time, it said.

“Cessna cannot simply drop a major supplier without significantly impairing its ability to continue its production needs,” it said.

In addition, Avcorp consistently lost money on the sale of parts to Cessna, with significant negative margins on the Citation CJ3 and Sovereign tail assemblies.

And for many years, Avcorp has been insolvent or on the brink of insolvency, the filing said.

Cessna injected millions of dollars over the years to keep Avcorp afloat, it said.

In December 2010, Cessna advised Avcorp that it would begin to transition to other suppliers, and also to being making some of the goods in-house.

On June 6, 2011, Avcorp initiated arbitration against Cessna, alleging the contract was sole source.

On Nov. 16, two of three members of the arbitration panel favored Avcorp, saying the contract was “unclear and ambiguous” on whether it was exclusive.

The panel also found that Avcorp did not materially breach its contract with Cessna, and it concluded that Cessna had waived its right to complain about late deliveries when it continued its business relationship with Avcorp.

Finally, it concluded that Avcorp lost profits of $27.4 million when it transferred work to others.

Cessna is seeking to get the award dropped.

Implying a “sole source” or exclusivity language where none exists violates Kansas public policy, the filing said.

It also threatens to undermine long-standing supplier-purchaser agreements and parties’ freedom of contract under Kansas law, it said.

And it encourages parties to terminate contracts at the first problem, rather than to work to continue a struggling supplier-purchaser agreement, it said.

Avcorp alleges the complaint by Cessna does not satisfy the “narrow, legal grounds on which the arbitration award could be vacated,” it said in a statement.

“The company intends to vigorously pursue the confirmation of the arbitration award and the dismissal of Cessna’s motion to vacate with the U.S. District Court,” it said.

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